Monday, March 8, 2010

Short-Term Treasuries as Trading Sardines

There's an old joke about a can of sardines. It is supposed to be of such an amazing quality that it changes hands at ever-rising prices. Finally a sardine-lover pays top dollar, opens the can, and is quite disappointed to find that these are just plain ordinary sardines. He goes to the person who started in with the claim that these were specially great sardines and demands an explanation.

"But these are trading sardines," the original hypester says. "They are not meant to be eaten."

Now, we are all familiar with over-hyped stocks. But short-term Treasuries?

“Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld, partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “In this low-rate environment, Treasuries can be huge pickup and very good value on an after- tax basis in the shorter-end.” . . .

Treasuries due in one to three years have returned 0.78 percent since December, after gaining 0.79 percent in 2009, according to Bank of America Merrill Lynch index data. Similar maturity state and local securities returned 0.57 percent this year, extending 2009’s 4.2 percent gain. Things have come to a pretty pass when record-low interest rates can be touted as offering "very good value".

Any financial professional who tells who that Treasuries are "good value", much less "very good value", is incorrect. What has, of course, happened is that the Fed has opened the monetary spigot and is willing a "recovery" in nominal terms.

Absent a plague or some truly major other type of catastrophe, there will likely be economic "growth" as well as new hiring. Population pressures, general technical advances, and even the post-bubble history of Japan, which is said to have been out of recession 80% of the time despite a stock market that is still down about 75% from its 1989 peak argue for that.

Unless one believes that the U. S. will also follow Japan into outright deflation despite the continuous history of inflation since our Great Depression, one thing short-term Treasuries are is bad "value". They are fine for parking money, but they smell as if they have become similar to trading sardines: overpriced. Let the pros trade amongst themselves and claim they "made money" in these securities yielding almost nothing because someone paid an even higher price.

If ordinary people want to park money, they can do better in AmEx Bank, demand deposits in which yield 1.30%, than in Treasuries.